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Articles and opinion

Most multi-family offices are regulated by the Financial Services Authority as discretionary investment managers.  However, single family offices tend to shy away from regulation due to misplaced concerns about the cost of being regulated, lack of privacy and the perception that compliance with regulation results in a lack of flexibility to operate.

However, SFOS that are not afraid to become regulated can take advantage of a unique opportunity to incubate investment management talent by providing the regulatory infrastructure as well as seed capital in return for a share of the management and performance fee. This is of particular interest to hedge fund managers looking for a UCITS home. Given that the costs of initial FSA authorisation and regulation are a one-off minimal cost and that single family offices are contributing to on going costs of their investment manager’s regulatory capital through the payment of a management fee anyway, then Rosalyn Breedy argues that single family offices are cutting themselves off from longer term investment opportunities unnecessarily.

The process of approval for a correctly completed application for authorisation may take up to six months but the FSA set a voluntary performance standard to process 75% correctly completed applications within 12 weeks. The process involves choosing and creating an appropriate legal entity, putting in place an appropriate business plan and capital resources before applying for authorisation.  Senior management, customer facing and compliance roles need to be allocated and systems and procedures may need to be introduced, the expertise for which can be bought in, if not available in-house.

Once authorised in the UK, a single family office will also automatically be categorised as an ‘eligible counterparty’  or ‘professional investor’, which has a number of advantages over the long term. Classification as an eligible counterparty or professional investor as opposed to a retail investor means that a full range of investment opportunities can be made directly to the SFO without counterparties having to go through intermediaries or comply with a myriad of risk warnings or exemptions.

 Counterparty financial institutions are naturally cautious of opening themselves up to the risk of mis-selling claims, so retail investors will not be offered every opportunity available.  This means that the single family office may not be offered more complex or esoteric investment products, which although risky may actually meet their needs.

As an institutional investor, you will also have the advantage of speed and flexibility.
For example, if you come across an attractive investment opportunity which you wish to syndicate with one or more co-investors, then if already regulated you are a position to respond promptly and create a new fund quickly.  Without regulation in place, this would be a much slower and costlier exercise, which might mean that you lose the opportunity.

Whilst we all hate rules, following the FSA regulatory rules simply means that the SFO staff are forced to deal consistently with issues which exist regardless of whether you are authorised.  For example, these include procedures for anti-money laundering and determining conflicts of interests in a transparent manner. The discipline of the authorisation process will mean that proper money management systems and procedures are in place from the outset. Conduct of business rules address operational and investor concerns.

Given that privacy is a key concern for single family offices, in Breedy Henderson’s experience the impact of FSA regulation on privacy tends to be over-exaggerated.  At present the FSA is not concerned with taxation and the focus of its scrutiny is firmly on the banks and on its treating customers fairly initiative at present, rather than initiatives by investors which have the potential to address some of the market failures.
 It is also easier for US investment managers to deal with an authorised person and paradoxically the provision of an FSA authorised number by a SFO can actually protect privacy by halting numerous questions on the identity of the family from investment managers.

Furthermore, the regulatory oversight is on the legal entity, its controllers and the approved persons not on the beneficiaries.

The other commonly cited concern is the need to set aside a certain amount of capital.  Given that single family offices will be managing funds of £1 billion upwards and a balanced portfolio will be a key part of that remit, then this tends to be covered as a matter of course.

Whilst FSA authorisation and regulation is not a step to be undertaken lightly, Rosalyn Breedy advises single family offices not to dismiss it quickly either.  As with any business opportunity, you need to undertake a careful assessment of your particular circumstances and the potential opportunity costs as contrary to popular belief authorisation may be a good thing for the skilled single family office which wishes to aggressively increase its returns.